BMI maintains its expectation that the country’s budget deficit would be reduced to 4.3% of gross domestic product in 2024 from 4.9% this year.
PETALING JAYA: Fitch Solutions unit, BMI Country Risk & Industry Research, is holding on to its 2024 forecast for Malaysia’s budget deficit, which is in line with Putrajaya’s fiscal projections.
The research unit maintained its expectation that the country’s budget deficit is set to reduce to 4.3% of gross domestic product (GDP) in 2024 from 4.9% this year, following details tabled during Budget 2024 last week, which it termed as a “positive step” towards fiscal consolidation.
As Malaysia looks at the medium-term goal of lowering its deficit to 3.5% of GDP by 2025, BMI said the most significant announcements from the budget tabling were a hike in the sales and service tax (SST) to 8% in 2024 from 6% currently, the implementation of a luxury goods tax of 5% to 10% on selected high-value goods, as well as the introduction of the capital gains tax on the sale of unlisted shares starting next year.
With regards to the unity government’s target to generate an additional income of RM14.6bil in 2024 with these changes – equivalent to 0.7% of GDP – the research outfit said: “More broadly, total revenue is expected to rise by 1.5% to RM307.6bil in 2024, representing 15.6% of GDP, of which the increase in tax revenue would help offset the decline in non-tax revenue.”
BMI reported that the government is foreseeing non-tax revenue to recede by 13.3% to RM74.2bil on reduced investment income receipts, underpinned by the anticipated drop in dividend income from Petroliam Nasional Bhd to RM39.7bil in 2024 from RM47.8bil this year.
Commenting on the BMI findings, an economist with a local research firm reiterated that it was high time the government implemented consolidation measures, unpopular though they may be, especially among the middle class.
“The recognition by rating agencies such as BMI just underlines the fact that Putrajaya cannot keep spending funds on subsidies, which would deepen the financial deficit to the detriment of future Malaysians,” he said.
On expenditure, BMI highlighted the government’s projection of a net development spending drop of 7% to RM90bil next year, which represents 4.6% of GDP.
This was in line with the Public Finance And Fiscal Responsibility Law passed on Oct 12, which stipulates that the country’s annual development spending must exceed 3% of GDP.
Under the 12th Malaysia Plan (12MP) mid-term review in September, Prime Minister Datuk Seri Anwar Ibrahim unveiled a higher allocation for development expenditure to RM415bil from RM400bil initially.
On the higher allocation, Asia-Pacific economist at Singapore-based Coface Services South Asia-Pacific Pte Ltd, Eve Barre, told StarBiz that the higher expenditure allocation could slow down the fiscal consolidation process.
However, she said the wider allotment was not expected to result in a burgeoning fiscal deficit, thanks to the introduction of targeted fuel subsidies – which accounted for 7% of the government’s total spending – as well as efforts to enlarge its tax base and to reduce spending leakages, measures which were announced last Friday.
Tradeview Capital chief investment officer Nixon Wong believed that Budget 2024 was aiming for a healthier fiscal position for the country in the medium to long term.
He concurred that the increase in development expenditure, which is geared towards long-term initiatives, will be balanced by measures to boost revenue such the short-term SST increase and the gradual execution of targeted subsidy initiatives.
While suggesting the reintroduction of the goods and services tax (GST) in the longer run to further enhance revenue collection, he nevertheless viewed Budget 2024 as “neutral to positive” in the medium term.
“The moderate spending is supported by higher GDP growth, driven by domestic activities and increased investments in sectors like infrastructure as well as electrical and electronics.
“Additionally, the raised bonuses for civil servants and increased support for lower-income group are expected to boost domestic consumption, potentially leading to higher tax collections,” said Wong.
Meanwhile, Anwar emphasised that his administration’s focus on reducing fiscal deficit is aimed at boosting investor confidence and spurring economic growth.
He opined that investors will lose confidence in the government’s leadership if it allowed Malaysia’s national deficit to exacerbate, as they could arrive at the idea that the country is run by an irresponsible leadership or administration.
The Prime Minister added that it would be a failure of management if future generations could not afford to pay off the swelling debt, and instead pointed out that “reasonable” debt has to generate growth.
Wong believed that Anwar was treading cautiously, emphasising economic growth and fiscal strength without resorting to populist measures merely to please the public.
In particular, he believed this approach instills confidence among foreign investors, potentially bolstering the ringgit’s position.
“While Budget 2024 lacks intricate details, it aligns with earlier economic plans such as National Energy Transition Roadmap, New Industrial Master Plan and 12MP.
“These initiatives prioritise long-term economic stability over short-term gains, aiming to attract both foreign and domestic direct investments,” he said.
